In this episode of The Expeditors Podcast, Wendy Armbruster, Regional FTZ Program Manager of the Americas, opens the lid on the history of free trade zones and how they're used today to keep companies invested in their local labor pools, resources, and more. We'll also learn about interesting rules and exceptions when operating as an FTZ, along with the qualities that make FTZ programs the right option for an organization.
Chris Parker: Another thing I'm particularly interested in is the influence FTZs have had over industries and the form of products we buy. So to talk more about this, I'm joined today by our Regional FTZ Manager for the Americas, Wendy Armbruster. Wendy, how are you doing today?
Wendy Armbruster: I'm doing great, Chris. Thank you.
Chris Parker: Good. First things first, let's get to know you a little bit more. What's your journey been to get to this role?
Wendy Armbruster: Oh, well, I've actually been in the industry for a long time. I hate to say how long it's been.
Chris Parker: Everyone does; everyone I have on this show seems to not want to talk about their experience and tenure because it spans so many years, which is fantastic, but yeah, please go on.
Wendy Armbruster: Yeah so, I actually have been in the industry for over 40 years. I'm a licensed customs broker. I've been with Expeditors for, this is my 25th year this year.
Chris Parker: That's incredible, nice.
Wendy Armbruster: So yeah, so I've always been in the customs activities in all of my roles. And recently, I shouldn't say recently, but for the last 12 years, I have actually spent doing just FTZ for Expeditors. So, it's a pretty interesting thing. The cool thing about FTZs is that they certainly aren't boring.
Chris Parker: I'm sure, yeah.
Wendy Armbruster: Hence the 12 years that I've been doing it. And, you seem to learn something new all the time.
Chris Parker: I feel like that kind of answers my question that I like to ask folks is, why do you care about FTZs and the work that you do? What kind of motivates you every day?
Wendy Armbruster: Well, again, the great thing about FTZs is that they really help companies, so our customers from an Expeditors perspective. And it helps customers to reduce costs and be able to save money which then in the end kind of helps us out as consumers. But the important thing is to see if an FTZ is right for a specific company and whether they'll benefit from it. But there's definitely a lot of companies that use FTZs and get huge benefits from it.
Chris Parker: Gotcha, gotcha. All right well let's go ahead and dive in today's topic and start from the very, very top of it. Could you please explain to me like I'm five years old here, what is an FTZ?
Wendy Armbruster: Okay. I'll try to do that. Well, FTZ itself is actually an acronym, and it can mean a couple of different things, but the most common term that is used is free-trade zones.
Chris Parker: Right.
Wendy Armbruster: And that actually covers a lot of different programs that happen all over the globe, not really just in the United States. So they all may have different names and called different things, but FTZ is kind of that very high-level thing that describes all these different programs that are available.
Wendy Armbruster: But, FTZs are offered typically by governments in all countries directly or through designated parties. And it's intended to entice a company to set up their company and their operations in that country, which then, of course, helps that country. So, because if you're going to open up a company in that country, you're typically going to use the country's local labor force. So people from that country will be employed.
Wendy Armbruster: It'll also help usually to help use domestic products from that country. So, it's an economic type thing where they really want to draw these companies there and provide them incentives to be there in that country. And those incentives typically offer streamlined customs processes or reduction or deferral of duty and taxes.
Wendy Armbruster: And each country has its own rules and regulations. There's not like a single secret sauce recipe. "If you do this, you can be an FTZ anywhere," that doesn't really exist. Each country has its own rules and regulations, and you have to find out what that is for that country and whether it's going to work for you.
Wendy Armbruster: I mean, some countries, the program's very focused on just manufacturing incentives. We just want you to be doing manufacturing here. And other countries maybe it's about exporting from that country producing things in that country, but you only get a benefit because you're going to export it from that country.
Chris Parker: Right, because you're taking advantage of the labor force that's there, the materials, and things like that.
Wendy Armbruster: Yeah. I've read that free-trade zones actually began early in the times of the Phoenicians. So it's really old.
Chris Parker: Yeah, no kidding.
Wendy Armbruster: The Romans even did it. And their main purpose was for economic and political domination, which ironically is what we do today. So it's not a new concept.
Chris Parker: Right. In context to the U.S., how did our free trade zone or... Well, we refer to it as a foreign-trade zone here. What's the history behind that?
Wendy Armbruster: Yeah. And that's great. I'm impressed that you know that our program is called the foreign-trade zone program. But they've actually been around for quite a while, not quite a century, but back in.
Chris Parker: Or centuries.
Wendy Armbruster: Yes, or centuries that's for sure. But back in 1930, there were a senator and a representative who decided to implement some trade policies to try and increase revenues. So that was their main reason for doing it. And it was called the Smoot-Hawley Tariff, and it raised U.S. tariffs on over 20,000 imported products. So it affected a lot of companies, and they were actually the second-highest tariff levels in U.S. history. And they were only exceeded by the tariffs of 1828, were much higher. And many historians and economists believe that this policy backfired. I mean, it really caused issues with our trading partners. They retaliated against us, imposing higher taxes on us, reducing our exports, not accepting things that we wanted to export, and then also impact our own imports from those foreign countries that we needed.
Wendy Armbruster: And so this act that they put in, the Smoot-Hawley Tariff Act, was considered a contributor to the Great Depression.
Chris Parker: Wow, okay.
Wendy Armbruster: So very interesting.
Chris Parker: Yeah, thanks, guys.
Wendy Armbruster: To know that. Yes. Yes. So in 1934, and while we were still in the midst of the Great Depression, Congress passed the Foreign-Trade Zone Act. And again, it was intended, just like all the global programs are to help reduce duties, deferral of duties and reduce those and encourage companies to stay here in the United States. And, of course, they wanted to try and reduce those effects of the Smoot-Hawley Tariffs. I mean, that was one of the main things that they wanted to reduce was to try and get those companies to stay here in the U.S. and instead of sending it overseas.
Chris Parker: Right.
Wendy Armbruster: So, and what's interesting is today, we are living with all these Trump trade remedies that have come into place.
Wendy Armbruster: We have increased taxes again, which are very similar to what the Smoot-Hawley taxes were. They may not be as far stretched as the Smoot-Hawley taxes were, but they still raised duties 10 to 25%, which again hasn't really been seen for quite some time.
Wendy Armbruster: So, the thing about the Foreign-Trade Zone Act with those new Trump trade remedies is it that there's certainly benefits that you can still get from the program. So such as, if you're exporting to other countries, you don't have to pay those high duties, but there were other benefits to companies who were doing manufacturing here in the U.S. that those trade remedies actually impacted. So while we're trying to hurt other countries, we, to some extent, hurt our own people here in the United States with those trade remedies.
Wendy Armbruster: So, and that's not to say that there still weren't companies benefiting from FTZs; it's just that those trade remedies put a little bit of a wrinkle for some.
Chris Parker: Looking at...You mentioned earlier that there is no governing board or some kind of entity that kind of manages all these trade zones and keeps it at some level of consistency. They're all kind of owned by their countries. How do these trade zones kind of communicate with each other to keep the customs process moving easily and fluidly between them?
Wendy Armbruster: Each country, again, has their own rules and regulations for how you can become an FTZ. And all of them do start with the government, either a foreign government or the U.S. government. In the, here in the U.S., which might... Doesn't cover all of them, but just for a good example, is that any company in the U.S. can become an FTZ.
Chris Parker: Oh, so it's not a physical location; the company itself becomes a free-trade zone.
Wendy Armbruster: So it's the company itself, at a physical address. So they have a physical address. And so they own that company. They're either buying or leasing the land in the building, but they have the right to become an FTZ, but they have to be sponsored to become an FTZ. So even though they're the ones who become the FTZ, their project has to be sponsored. And they're sponsored by an entity, which is called the grantee. And that grantee is given that right by the U.S. Government. Specifically, an entity called the FTZ board in Washington.
Wendy Armbruster: And so all states have them; all 50 states have one or more grantees that will sponsor a company's project. And so they have service areas. So if you're in Detroit, there's typically going to be a grantee who can service Detroit and the surrounding metropolitan area. And then maybe in the west side of the state, there's another grantee that sponsors that area.
Wendy Armbruster: So, different people can become an FTZ through the sponsorship with this entity. Who's been, again, approved through our government. In other countries, it could be that you're working directly with the government to become that FTZ.
Chris Parker: So it's almost like you're an extension of the government versus a partner with it, or you're... Or just like an independent factor that more or less has the approval of the government.
Wendy Armbruster: Yes. Yeah. I think that it's more the approval of the government to be able to do that. To do that process.
Chris Parker: When you talk about this, I'm thinking of three parties here: we've got, and please correct me if I'm wrong, we've got the country operating the FTZ or the approving of the FTZs and making them, we've got these companies that are moving their goods within them, and then customers that are purchasing those goods when they've kind of just been released into commerce. You've touched a little bit on it, but how do they all win, and alternatively, what are the costs to all these benefits that we receive?
Wendy Armbruster: For any country or the U.S., either the country wins or in this state, in the case of the U.S., our states may win, right? Which again is our government, because they're drawing companies to their local area. And so the jobs are there now to provide to the community, there's local products and materials that are being used, the government or state is collecting taxes from those entities.
Chris Parker: Sure.
Wendy Armbruster: So, they're benefiting by having companies be in their country or in their state. So they get that benefit. And then the company is going to win. And because as an FTZ, they have a place that is offering them the ability to reduce certain duties that they would normally pay by engaging in that activity. And then we, as the consumer, we actually don't have to pay as much for our products because the company has been able to reduce their costs.
Chris Parker: Are there any other parties then that we haven't covered then that also benefit from these kinds of things or that benefit from FTZs?
Wendy Armbruster: Typically, it's those three parties; it's the government, whoever the company is, and then us as the consumers.
Chris Parker: Where do freight forwarders and logistics partners, service providers, where do we fit into this whole mix?
Wendy Armbruster: Oh, that's true, and that's actually a great question, Chris. Because companies who maybe don't make products can offer services through an FTZ to other companies to take advantage of that rather than... So you think of very large companies, they're going to probably want to turn their facility into an FTZ, but a smaller company, it may be too expensive to do so.
Wendy Armbruster: And as an example, so there are a number of companies down along the southern border who use warehousing where a third party is an FTZ, and they're supplying products to Mexico. So they don't have to... It could be made up of a bunch of many small companies. Again, it may not be worth it because the cost can be so high to set up an FTZ that they can't turn their own facility into an FTZ. It also could be geographic. They don't just don't have an office that close to the border. So you can use a third-party FTZ, which again is an FTZ, but they can offer services to those companies to then help ship them to Mexico through an FTZ so that they don't have to pay duties.
Chris Parker: Before we started doing this podcast, I was, and still do, aside from the pandemic, am a videographer. So I've had the opportunity to go to various Expeditors warehouses and warehouses of our partners to see these FTZs in action. And I always see a chain-link fence around them. It's a very protected kind of space. And I believe, correct me if I'm wrong, Customs & Border [Protection] is there operating it or like TSA or some kind of government entity is operating there and doing the scans and things like that. Could you talk a little bit more about that process and what that's like for goods to flow through an FTZ like that?
Wendy Armbruster: Yeah. So typically, the FTZ is still going to be managed by a company, not the government. Like the TSA stuff has some other stuff that may need to have government officials there. But we get this approval to become an FTZ, and then you're considered a bonded facility, which the government has oversight over you. But they aren't typically there doing that work. So you, as the company, it's your facility, it's your operations, you're providing the staff, providing the people to manage that FTZ.
Chris Parker: Right, and they're ensuring compliance essentially, though.
Wendy Armbruster: Exactly, exactly.
Wendy Armbruster: And there's a whole list of things that you have to with local customs, be approved for, and have to... Things you have to do to stay in compliance. Because you aren't considered a bonded facility, and Customs will visit you. They will visit you, and they don't have to tell you they're going to visit you; they can just show up because they have this oversight over you.
Chris Parker: So we've covered some history, but I'm really curious about today. What would you say is the current state of FTZs, and how have they been impacted by the pandemic or other global events and market conditions?
Wendy Armbruster: Well, you know, ironically, we talked again the history lesson about them starting in 1934. And quite frankly, up until the 1970s, FTZs were very little used. In the 1970s, early 1970s, there was only 13 companies using FTZ.
Chris Parker: In the U.S.
Wendy Armbruster: And you would...Yes, in the U.S., and you would think that there would be many more companies using FTZ. Well, over time, some of the legislation was changed to help manufacturers and distribution companies. And today, as of 2020, there's a little over 3,300 companies in FTZs. Which still, in the grand scheme of things, is not a big number.
Chris Parker: No, it's not.
Wendy Armbruster: You would still think that there would be a lot more companies. But the thing is, is that FTZs are not necessarily a good fit for every company. And it's still very much considered a very niche market.
Chris Parker: Could you talk about that? What makes for a good company, or what makes it an FTZ the right thing for a company to do? I know you talked a little bit about size and things like that, but what other factors are there at play in order for an organization to consider becoming an FTZ?
Wendy Armbruster:
Yeah. And there's a list of things that you want to consider, obviously. And one of them is, you have to be doing import activity from other countries and trade with other countries for something like this to make sense. And you have to be doing certain types of activities for it to make sense. So manufacturing is one of them. That's one of the reasons like automobile companies are very much into FTZs because we all know that our vehicle does not have only US-made parts in it.
Chris Parker: It would cost a lot more.
Wendy Armbruster: There's a lot more parts in it that are foreign, but they assemble them here in the U.S. And so by using that FTZ to manufacture that vehicle, there's benefits that they can get to, again, lower the cost, because they'll pay less duties in the FTZ.
Wendy Armbruster: Pharmaceutical companies, too. A lot of them, well, pretty much all of them, if they have locations here in the United States, are FTZs because they can import liquids and powders into the U.S. Manufacture them into a tablet or a capsule. And while that raw component that made up or pieces put together to make up that that particular medicine could carry a duty rate, once they make it into a tablet, it's now duty-free. So they can eliminate those duties altogether.
Chris Parker: Wow. So the benefits that FTZs have more or less played a factor in kind of how we receive our medicine and medications. I know that sounds kind of like conspiracy theory here, but it makes sense, though; if that's the form that allows for goods to move duty-free, why wouldn't you?
Wendy Armbruster: Yes, yes. And so again, the company itself has to be doing certain types of activity for it to make sense. I mean, oil refineries are FTZs, and if the oil's flowing through the pipeline from one country to another. So if it comes in from Mexico to the U.S., it's flowing through a pipeline or possibly under the ocean drilling in international waters. But that oil coming into the U.S. would normally carry a duty of some sort. By doing the pipelines and doing it in an FTZ, there're ways that they can reduce those costs because they're an FTZ.
Chris Parker: Right, the organization that is doing the drilling that is now their resources, the raw resources that they're pulling are protected, from duties because they are the ones who are mining it themselves.
Wendy Armbruster: Correct.
Chris Parker: Fascinating. That's super, super cool.
Chris Parker: What other benefits would you say have come out in FTZs? What are the, I guess, what are the kind of the hidden or the, "I never would have thought that that was the way it was done," when it comes to FTZs?
Wendy Armbruster: Yeah. And I mean, there's really some interesting stuff again with FTZs. And when I first started doing FTZs, of course, I thought, "You can do that in an FTZ?" And then I thought, "Is that legal?"
Wendy Armbruster: And ironically, it all is. So, it is very interesting, I mean... So companies operating an FTZ can benefit by reducing this merchandise processing fee by filing weekly entries. So, let's say someone imports, they're flying their freight in because it's got to get here so that they can supply it to their customers. And maybe they fly in five days a week. Those five days a week, they're paying a very high fee of like $528. If they put those shipments through an FTZ, they would only have to pay the $528 once instead of five times.
Wendy Armbruster: So for some companies who are literally bringing in hundreds and hundreds of containers, they're paying those high merchandise processing fees. And by filing weekly entries in a zone, they can greatly reduce that fee. I mean, there are... Some companies save a huge amount of money on that fee, that particular benefit alone. I mean, other things that you can do on a zone is again you don't pay duties in an FTZ until it actually leaves.
Chris Parker: It goes out for purchase into commerce and stuff, right.
Wendy Armbruster: Yes. And while it's in the FTZ, it's technically not in the commerce.
Chris Parker: It's in this limbo state.
Wendy Armbruster: Exactly, so you can do stuff to the goods. So, let's say you received a whole shipment, and it maybe came over on the ocean, and there was a hole in the container and its apparel, and all the goods got soaking wet. You can't sell them. So you do have an option. You could return them back to the vendor. And, again, you wouldn't have to pay duty on it because you could export it from the FTZ, or you could destroy them in the FTZ. So that's another benefit of an FTZ because the goods never come into the commerce. They could cut them up and shred them and throw them in the trash. They could put them in an incinerator, but that's another benefit of being in an FTZ.
Wendy Armbruster: Some companies, the parts become obsolete or have a shelf life. So it's only, they can only sell it. It has to be 18 months from when it's manufactured. So again, in the zone, they can destroy it. Airlines, all the airlines do this, where they supply our alcohol.
Chris Parker: Thank you, airlines.
Wendy Armbruster: Yes. So that while we're on those international flights, we have something to keep us busy. But they can buy that alcohol locally, put it on international flights, and they don't have to pay excise taxes.
Chris Parker: Interesting.
Wendy Armbruster: And then there's other states that have inventory taxes. And there's a certain approval process through the FTZs that if you get this particular approval, you're not subject to that inventory tax, which, again, can be very high. Now it's possible that the local state entities, like school, city, state, don't want to lose their money. Because that's where a lot of the inventory tax goes, and you may have to negotiate a lesser payment than what the inventory tax would have been, but at least you get to eliminate those duty and taxes.
Wendy Armbruster: And yet one other kind of interesting thing, it's one of the very first things I saw when I visited an FTZ during my first year, was an FTZ who holds sugar. And the sugar is a quota item, so it can only come in during certain periods. And once, once that quota is filled, you can't bring it in anymore. So by holding it in an FTZ, you got the sugar, and they're in these ginormous bags, and they're filled with sugar; they're sealed safe. But as soon as the quota opens, they're filing entries.
Chris Parker: So this saves them on time, significantly for transportation time, right? Not just the cost, but the time as well to meet that demand.
Wendy Armbruster: Yes. Because a lot of companies with quota, they're shipping across the ocean, hoping to get here in time for the quota to be open, and it gets here, and now the quota is full.
Chris Parker: Yeah, it takes a month or something like that, right?
Wendy Armbruster: So they've got to do something.
Wendy Armbruster: Yes.
Chris Parker: Incredible, I did not know that. That's super cool.
Wendy Armbruster: Yeah. So they are, that's the thing. FTZs are cool.
Chris Parker: I just feel like there's so much out there that, or at least for around these FTZs, that anyone can have questions about. If they wanted to learn more, would they reach out to you? What's the best way to get into contact with you to talk more about these if people were interested?
Wendy Armbruster: Yeah, absolutely. And I spent almost my entire day only talking about FTZs, and I love to do so. But I can be reached by phone or email. My phone is (810) 300-4212 and Wendy.Armbruster@expeditors.com.
Chris Parker: Fantastic. Well, Wendy, thank you so much for your time. This is fascinating to talk about, and really appreciate everything that you do.
Wendy Armbruster: Thank you. This was great, Chris. Love talking about FTZs.
Chris Parker: Thanks for listening to today's episode. If you've got any questions or want to learn more about today's topic, check out the show notes for more information. And before you go, make sure you're subscribed on whatever podcast app you're using so you won't miss the next episode. To learn more about Expeditors, you can find us on LinkedIn, Facebook, Instagram, and Twitter, or simply visit us at expeditors.com. Take care, and I'll see you next time.